Part 1: Actual Cash

First, we are going to talk about actual hard currency. I am an advocate of having more.

Lots of people (especially young folks) dislike cash. They say you can get pretty much whatever you want with a credit card.

True, but—

Now you have a credit card bill, and not many people pay it off every month.

There is an electronic record of your transactions.

I will cop to being a bit like those libertarian anti-government types, and I like the anonymity of cash. Not that I’m doing anything illegal or suspicious, but the government doesn’t need to know where I go to lunch every day.

I generally carry around $500-$1,000 in cash, because of the optionality of it (more on this in a second). If there is something I want to buy that is slightly expensive, I don’t need to put it on the credit card.

Am I worried about getting mugged? Not really. The $500 or $1,000 I would lose is probably less than most people pay in credit card interest in a year. If you can’t pay it, you probably have too much leverage.

It is also good to have some cash hidden in the house somewhere. The example I always use is: a giant storm cuts power to the entire state, knocks a tree on your house and the ATMs don’t work. How do you get the tree off your house? $5,000 in cash should do the trick.

Lots of personal finance experts will tell you that it is good to have $10,000 laying around in case of emergency. I am telling you that you might want to have it in actual cash.

I am way more paranoid than you. I can think of a hundred different ways things can go wrong where you might need $10,000 (or more) in cash.

I’m not earning interest on it, but the optionality of cash is worth more than the $150 in interest.

Optionality

Optionality means different things to different people. It has a very specific meaning to finance people who have studied option theory. An option is the right, but not the obligation to buy something at a certain price by a certain time.

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More succinctly, it is a choice.

When you go to the grocery store, you can choose between Original Speed Stick deodorant, or Irish Spring Speed Stick deodorant. That choice has intrinsic value. If you did not have a choice between Original or Irish Spring, you would actually be poorer.

Bernie Sanders once complained that we have 23 different kinds of deodorant. The fact that we have a choice among 23 (or more) different kinds of deodorant is what makes this country so rich. It’s not the deodorant—it’s the choice. Some places don’t have that choice—they only have one government-issued brand of deodorant. The most important thing that capitalism gives us is choice.

Anyway, if you are cruising around with only a couple of bucks in your wallet, you have very little optionality. There are very few things you can buy without borrowing money.

And remember, lots of places offer discounts if you pay in cash, including gas stations, restaurants, doctor/dentist offices, and jewelry stores. I have saved a lot of money on this over the years. And the discounts are usually greater than whatever points/miles I would earn on the credit card, so don’t come at me with that.

In a Larger Sense

But this is the more important aspect of cash—if you have liquidity, then you have opportunities.

Life will throw opportunities at you from time to time. Once, a friend of mine showed me a hedge fund that I thought was a can’t-lose proposition.

I was able to take advantage of that opportunity because I had lots of cash laying around. It ended up being a good opportunity! I made money on it.

Let me drive this point home again—stocks are not cash. It is not “money in the bank.” Say you were fully invested in a stock portfolio, with no cash, and this hedge fund opportunity came along. You would have to sell some stocks to raise cash.

But maybe you don’t want to sell the stocks! Maybe you think they are still good investments. Maybe you don’t want to pay the tax bill on your gains, or maybe you don’t want to sell at a loss.

So it becomes a hard decision. Once you spend your cash and you acquire assets, it because difficult to clear the psychological hurdles to part with those assets. This is known as the endowment effect.

Most people don’t get hedge fund opportunities, but they will get real estate opportunities. I was able to make a bid very quickly on the house I am living in because I had cash laying around. This house has been the smartest decision I have made in my entire life.

How many times has there been a house you wanted to buy but it was just impossible to get your financial s--- together to do it?

It’s not just hedge funds and houses. It’s businesses, it’s dental offices, it’s RV parks—at some point in your life, someone is going to come to you with a great opportunity and you won’t be able to take advantage of it unless you have the liquidity.

I’m sure you’ve heard these stories of multibillion dollar business that were started with $5,000. The key is—make sure you have $5,000!1

The Perils of Being Fully Invested

Cash has such an awful, awful reputation—especially after this big bull market. Cash is a “drag on returns.” It’s a race to see who can be the most fully invested—maybe even on margin.

There is nothing more dangerous than being “fully invested.” Being fully invested means that you have no options—because you have sold them all.

It can be a bit frustrating sitting on a big pile of cash, waiting for opportunities (especially in the stock market).

But would you rather:

a) Miss out on stock market gains, or

b) Be fully invested when the market drops 30% and have no “ammo” to take advantage of it?

I would rather a), because I would have the opportunity to buy stocks cheap if the market dropped 30%.

B) is the worst position of all—and most people freeze up, too scared to sell, too scared to buy. There is nothing better than the smug satisfaction of scooping up cheap assets while everyone who was “fully invested” is puking them. That has happened a couple of times in my life.

Final Note

Did you guys get to watch my ETF video on Monday? Let me know what you thought.

Mauldin Economics tells me there’s something pretty great coming your way next week too. You might want to check your email on Monday.
__________________1 By the way, this applies to not just investments—but toys as well. You can’t buy something fun if you don’t have the cash.

Jared Dillian

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Discuss This

Comments

wcrailey@hotmail.com

My cash is laying around and I ain’t lying! Thanks to the D Cash Express
for such noble insights. I thoroughly enjoy 10th Man. Street Freak too!

William Broadhead

July 26, 2018, 9:39 p.m.

I enjoy reading your work for the content, but if you hold yourself out as a writer you need to know and employ the English language correctly. You do not have cash “laying” around. You have cash lying around.

It distracts from the message you want to convey when your grammar makes your readers wince as they read your posts.

Gerry Wiley

July 26, 2018, 5:42 p.m.

Everything you say about cash is correct, except… I don’t see available cash discounts equalling the rebates i get by using a couple of credit cards for almost all purchases. I got over $1100 in cash rebates last year, and never paid any interest or user fees. In fact, my cash sitting there for autopay was making a little interest during the 45-day float. The real question is whether one has the discipline to keep control of their spending and pay-in-full every month.

bill.seward@outlook.com

July 26, 2018, 4:56 p.m.

More paranoid than me? Ha! My wife would argue that point with you half the night. Me, I’ll call it a tie, as we do seem to see a lot of things in a similar light.

One thing that you didn’t mention is that cash gets you discounts, even today. The ability to purchase with cash has saved me $thousands. I picked this up from a friend’s father-in-law after watching him buy a truck by simply peeling off $100 bills in front of a salesman. It was an amusing and educational moment. Of course, with the cash transaction reporting rules now in place many look askance at large cash purchases, but as long as you can prove, via W-2s or what have you, that you came by the money legally, you’re covered.

jack goldman

July 26, 2018, 3:03 p.m.

Sorry Jared, you missed an opportunity. Cash is silver and gold coins that hold value for decades. Gasoline was three silver dimes in 1960’s and still three silver dimes in 2018. That is CASH. Currency is not cash. Currency loses buying power as the currency supply is increased to steal the value of savings. The value of currency falls giving currency, not cash in gold or silver coins, a bad name. Saving in currency is foolish. Saving in gold and silver, for ten years or more is wise. Long term is 10 years or more. Short term is 10 years or less.

I agree with all you say but you use the wrong labels for money which is gold and silver and nothing else. People are put off today because government can steal the value of their savings if they save in CURRENCY instead of CASH, real MONEY, gold and silver. You should explain the difference. Silver, gold, stocks and real estate all go UP because government and the Federal Reserve increases the amount of counterfeited computer credits, counterfeited debt notes, counterfeited currency, and counterfeited crypto currency. We are living in a fake, pretend, counterfeited world vastly beyond our means with credit. Some of those promises are not going to be paid. Love your post but please education people about money, currency, and credit. Stocks and bonds are not money. Central banks keep GOLD and nothing else in their vaults as real money. I agree with the central banks. I hold my life’s savings as gold bullion.

meathtom@aol.com

July 26, 2018, 11:40 a.m.

Excuse me for being picky, but there is a grammar error here. “Lots of personal finance experts will tell you that it is good to have $10,000 laying around in case of emergency. I am telling you that you might want to have it in actual cash.”
Correct English is “lying”, not “laying”.

ianc@uvic.ca

July 26, 2018, 10:37 a.m.

I have an alternative. It’s called ‘margin’. I don’t have any cash at all - well, actually there’s $16,065 CDN ($1.25 US) in my margin account, according to my computer, and a couple of thousand in the bank - but what matters is that I can make a phone call and have $1,817,865 transferred to my bank account. I’ll pay interest at prime plus .5%, but at the moment every cent of it is making money for me.

cndhenson@ymail.com

July 26, 2018, 9:33 a.m.

Why do you have a comment section for the 10th man, but there is no comment section for the paying subscribers to Street Freak or EFT 20/20? Shouldn’t the paying subs get = or better treatment than the free readers?

Anyway, my comment is regarding Street Freak and 20/20. In my opinion each and every monthly publication should have a short section outlining your suggested asset allocation % (Cash, bonds, stocks, other). You have been adding this lately and I approve. To me the allocation is the most important question of all and it should be addressed as such.

mfree@pmpa.org

July 26, 2018, 9:15 a.m.

Your optionality argument affirms my “Maintain my degrees of freedom” argument.
Or as my father, a pilot used to say “Son, never gain or lose altitude unnecessarily.”
Having dry powder is critical to maintaining our investment “degrees of freedom.”

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